Rati ranjan

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Rati ranjan

  1. 1. DERIVATIVES
  2. 2. ORIGIN OF DERIVATIVES <ul><li>Financial markets are extremely volatile in nature and hence the risk factor is an important concern for financial agents. To reduce this risk, the concept of derivatives comes into the picture. </li></ul><ul><li>This is based on underlying assets </li></ul>
  3. 3. MEANING OF DERIVATIVES A Derivative is a financial instrument that is derived from some other asset , index , event, value or condition (known as the underlying asset). Rather than trade or exchange the underlying asset itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying asset. A simple example is a futures contract : an agreement to exchange the underlying asset at a future date .
  4. 4. DERIVATIVES DEFINED <ul><li>IN ITS NARROW SENSE </li></ul><ul><li>IN ITS POPULAR SENSE </li></ul><ul><li>IN ITS BROAD SENSE </li></ul>
  5. 5. <ul><li>The future contract which is made today is called derivatives. </li></ul>NARROW SENSE
  6. 6. POPULAR SENSE <ul><li>Derivatives are the financial instruments which are derived from the value of the underlying assets. </li></ul>
  7. 7. BROAD SENSE <ul><li>Derivatives are the outcomes (results) of the financial engineering. </li></ul>
  8. 8. NEED FOR A DERIVATIVE MARKET <ul><li>They help in transferring risks from risk averse people to risk oriented people </li></ul><ul><li>They help in the discovery of future as well as current prices </li></ul><ul><li>They catalyze entrepreneurial activity </li></ul><ul><li>They increase the volume traded in markets because of participation of risk averse people in greater numbers. </li></ul><ul><li>They increase savings and investment in the long run </li></ul>
  9. 9. PARTICIPANTS IN DERIVATIVES <ul><li>HEDGERS </li></ul><ul><li>SPECULATORS </li></ul><ul><li>ARBITRAGERS </li></ul>
  10. 10. HEDGERS Hedgers are those persons who protect the multinational firms against the risk at the time of fluctuation of currency
  11. 11. SPECULATORS <ul><li>Speculators are those persons who trades derivatives, bonds, equities, or currencies with a higher than average risk return for a higher than average profit potential . </li></ul><ul><li>Speculators take large risks with anticipating future price movements in hope of making large gains </li></ul>
  12. 12. ARBITRAGERS Arbitragers are those persons want to earn profit without taking any risk.
  13. 13. TYPES OF DERIVATIVES <ul><li>Forwards </li></ul><ul><li>Futures </li></ul><ul><li>Options </li></ul><ul><li>Warrants </li></ul><ul><li>Leaps </li></ul><ul><li>Baskets </li></ul><ul><li>swaps </li></ul>
  14. 14. FORWARDS <ul><li>A forward contract is a customized contract between two entities, where </li></ul><ul><li>settlement takes place on a specific date in the future at today’s pre-agreed price. </li></ul>
  15. 15. FUTURE <ul><li>A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. </li></ul><ul><li>Future contracts are a special type of forward contracts. </li></ul>
  16. 16. OPTIONS <ul><li>Options are of two types - calls and puts . Calls give the buyer the right but not the </li></ul><ul><li>obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. </li></ul>
  17. 17. WARRANTS <ul><li>A warrant is a bearer document of title to buy specified number of equity share at a specified price . </li></ul><ul><li>Generally warrants are offered to make the bond or preferred stock more attractive. </li></ul>
  18. 18. LEAPS <ul><li>The acronym LEAPS means Long-Term Equity Anticipation Securities . These are options having a maturity of up to three years. </li></ul>
  19. 19. BASKETS Basket options are options on portfolios of underlying assets. Equity index options are a form of basket options.
  20. 20. SWAPS <ul><li>Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. </li></ul><ul><li>The swaps are commonly used in two types </li></ul><ul><li>just like- interest rate swaps </li></ul><ul><li>currency swaps </li></ul>
  21. 21. INTEREST RATE SWAPS The swaps which are related to the interest related cash flows between two parties in the same currency are called interest rate swaps.
  22. 22. CURRENCY SWAPS <ul><li>These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. </li></ul>
  23. 23. RATI RANJAN

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